Experts: The prices of cheaper goods in Latvia have increased in percentage terms more than the prices of expensive goods

Economists explain that one reason could be that people who buy expensive goods have more alternatives. If their favorite expensive item becomes too expensive, they may switch to something cheaper. On the other hand, those who already buy the cheapest have no choice. This means that stores can more confidently raise prices on cheaper items, knowing that demand for them will remain. Another reason could be related to profit margins. If stores have a higher profit margin selling expensive items, they don’t have to raise prices as much to maintain profits in absolute terms when costs rise.

Economists emphasize that this explanation would, however, force retailers to sacrifice part of their relative profits (margins), which certainly cannot be ruled out given the high inflation and significant price competition between supermarkets. Also, this theory can be used to explain why the prices of expensive goods have not decreased – now the retailers are probably trying to recover the margin that was lost then.

The economists of the Bank of Latvia state that they have put forward some assumptions to compare how inflation can affect households with different income levels. This includes the assumption that households with more money buy more expensive alternatives to all products, such as wine, butter and milk, when in fact a wealthy family can buy regular milk or perhaps go without it. Furthermore, economists assumed that each category played an equal role in grocery spending, which is likely not the case.